BRICS New Development Bank could save Greece from financial vultures

BRICS New Development Bank could save Greece from financial vultures

This Greek tragedy has shown that the BRICS New Development Bank (NDB), which was launched at a summit in Ufa, was long overdue. While the shareholders of the New Development Bank debated questions about the quantity of capital and the size of insurance premiums, yet another country fell victim to the financial vultures. An alternative BRICS organization could save the Greek nation from a public flogging at the hands of the ECB and IMF.

According to reports from Ufa, where the seventh summit of the leaders of the BRICS states recently ended, an additional source of financing will become available by early 2016. This new mechanism will provide funding for projects without tethering it to the most basic requirements of global financial institutions: to fully expose a country’s economy to multinational corporations and to accept the neoliberal political agenda.
Needless to say, the implementation of these two IMF mandates is often tantamount to surrendering a nation’s sovereign economy to the economic dictates of the United States and the subsequent “dollarization” of all liquid assets. The entities that were created as global platforms for all countries now openly impose the monetary and financial policy of the American leaders. That mechanism was developed during the harsh imposition of economic liberalization in Latin America (ask Evo Morales) and the former Soviet Union in the 1990s and 2000s. Then, as now in Athens, the financial bloodletting was accompanied by a chorus of derisive commentary from oracles of economics, suggesting that perhaps the populace of the subject countries needed to roll up their sleeves and work a little harder.



The mainstream business press applauds Alexis Tsipras, because he values a good game with his creditors over the interests of his own people. To improve its “investment climate,” Greece is now in all seriousness offering to bring in another hundred consultants with Western MBAs and sell another island to Johnny Depp or even Warren Buffet in order to improve its image. Worked all your life, yet looking at a pension of less than 100 euros a month? But for that you get to live next door to Johnny Depp himself! As history has shown time and again, we cannot learn from someone else’s mistakes.

This is why Muhammad Yunus – the 2006 recipient of the Nobel Peace Prize – has stated that, although the NDB will be tempted to become a copy of the World Bank, it “must resist this from day one.” Mr. Yunus suggests focusing on three “zeros” as top priorities – zero poverty, zero unemployment, and zero harm to the environment. Peter Koenig, a former economist at the World Bank, has long said that that institution is no model of best practices for a new “mutual aid society” for developing countries. “The BRICS bank marks a major step toward de-dollarization and a new monetary system. It should replace the western-dominated predatory casino scheme,” said Koenig in a reference to the World Bank.

The concept of “social business and banking,” which has been successfully tested by Muhammad Yunus in Bangladesh, could form the theoretical basis of the NDB. There one finds a focus on involving youth in specially created businesses with limited licenses, aimed at solving social problems such as unemployment. The bank also plans to extend credit to major infrastructure projects in the energy industry.

Among the reasons cited for the accelerated creation of a financial “safety net” for the BRICS countries is the US veto on the plans to reform the IMF. Washington has refused to recognize the new facts of life and increase the economic weight of the five key emerging markets in that organization. In light of the recent problems in the Chinese stock market, it is clear that the founding nations want to shield their economies from the risk of being slapped by the “invisible hand” of the international financial institutions. The NDB could offer a mechanism to make it simpler to settle accounts using national currencies.

The organization’s target parameters were written as if they had the Greeks specifically in mind. Greece, which is deeply mired in unrelenting negotiations with its creditors, should not write off the new opportunities that will open up in early 2016.

Iran’s prospects on European gas markets

Iran’s prospects on European gas markets

Now that there is a chance that the sanctions against Iran might be lifted, that state’s oil and gas potential is once again a hot topic. Future increase in the amount of Iranian natural gas shipped to Asia and Europe is on the agenda.

Let’s take a careful look at the realistic potential of Iran’s gas sector, with an eye toward any impending rise in exports of upstream products.

Iran has over 30 trillion cubic meters of proved gas reserves, which makes that country one of the world’s leading gas powerhouses. Depending on the sources of statistics, the gold trophy for gas wealth belongs to either Russia or Iran. Either way, about 15-17% of the global reserves of natural gas lie under Persian soil.

Given such abundance, Tehran should have long been a major player in the gas-market balance of power. But international sanctions have hogtied the state’s oil and gas industry.

Deprived of petrodollars, the Iranians have not had the opportunity to invest financial resources in the development of the gas sector, which has long suffered from a lack of foreign technology.

Nevertheless, the Iranians remained upbeat (they are not a nation prone to apathy or discouragement – this I have noticed firsthand from extensive and close contact with Iranian officials at the Gas Exporting Countries Forum in Qatar), and they began active geological exploration within their country, so as to later astonish the world with the magnitude of their gas resources.

The payoff came quickly. According to FACTS Global Energy Iran has a high success rate of natural gas exploration in terms of wildcat drilling, which is estimated at 79% compared to the world average success rate of 30% to 35%.

A few years ago four sizeable new discoveries were opened for commercial development: Sardare Jangal, Forouz B, Madar, and Khayyam.

The first was discovered offshore in the Caspian Sea. That field is estimated to hold over 1.4 trillion cubic meters of gas. But given the field’s geographical location (approximately 241 km. off the shore of the Caspian Sea), it is possible that Iran will have to share ownership with Azerbaijan. In that case, the fact that the two Caspian states have not adopted any international legislation that would allow the development of cross-border deposits under the Caspian Sea could prove a legal hurdle to the exploitation of Sardare Jangal.

According to the Arab Oil & Gas Journal, Forouz B contains more than 707 billion cubic meters of recoverable gas reserves. Madar holds 495 billion cubic meters of raw materials. Both fields are located offshore in the Persian Gulf, and the first is expected to begin producing by 2017-2018. There are plans to use that gas to generate electricity for export to Iraq, Turkey, Pakistan, and Oman.

Khayyam has 260 billion cubic meters of gas reserves, of which at least 80% can be recovered, as well as 220 million barrels of condensate.

The Kish field’s reserves were originally estimated at 1.4 trillion cubic meters, but those assessments were carefully reevaluated in 2011 and the true holdings fixed at almost two trillion cubic meters of gas. FACTS Global Energy predicts that Kish will be one of the most profitable fields, with potential production of over 113 million cubic meters of gas per day. However, because of prolonged disputes between the companies developing Kish, as well as insufficient infrastructure to fully pursue the project (such as gas pipelines, a gas-processing facility, and a new electrical plant), the first phase is unlikely to start before 2020.

Laban has approximately 186 billion cubic meters of recoverable reserves of gas, plus 62 million barrels of condensate. The first phase of its development (with daily output reaching 21.2 million cubic meters of gas and 11,000 barrels of condensate) should be completed in 2015-2016.

The contract with Malaysia’s SKS Group to develop the Golshan and Ferdowsi fields, respectively containing about 1.1 trillion cubic meters and 311 billion cubic meters of gas, was canceled because the contractor refused to take part in the projects. However, Iranian firms are preparing to begin production on their own by 2020.

Speaking of Iran’s gas resources, it is worth noting that the vast majority of production comes from the South Pars, Nar, Kangan, and Tabnak fields. Approximately 13-14 trillion cubic meters of gas lie below the waters of South Pars, according to even the most conservative estimates.

Image Source - Mehr News Agency

Image Source – Mehr News Agency

Statistically, about 80% of Iran’s gross output comes from gas fields, while the remaining 20% consists of associated petroleum gas from oilfields in the provinces of Khuzestan, Ilam, and Kermanshah.

Despite the country’s impressive stockpile of resources, natural-gas production in Iran has not increased as quickly as expected in recent years. This was caused by delays in the development of South Pars, as well as the fact that the gas-transmission network and high-pressure compressor stations were not prepared for a greater influx of natural gas.

However, as noted by Hamid Reza Araqi, the managing director of the National Iranian Gas Company, shortly before the end of the last Iranian year (March 21, 2014 to March 20, 2015), the country was for the first time able to produce more gas than it consumed.

It has been reported that the average level of natural-gas production in the final months of 2014 amounted to 638 million cubic meters per day, or 68 million cubic meters more than in the same period in 2013.

According to BP, based on the numbers from 2013, Iran generated 166.6 billion cubic meters of natural gas, making it the third biggest producer after the US (687.6 billion cubic meters) and Russia (604.8 billion cubic meters). This summer that British company will publish its annual BP Statistical Review of World Energy 2015, which is expected to show an even greater rise in Iranian production, due to a surge in operations at South Pars.

In February 2014, that field entered its 12th phase of development, which quickly boosted gas production in the country. There are plans to have that phase operating at full capacity by 2016-2017, yielding 85 million cubic meters of gas per day and 120,000 barrels of condensate per day.

In early 2015 the Iranians brought on-stream the last gas platform that was included in the field’s 12th phase, which further hiked production.

According to Hassan Montazer Torbati, the planning director for the National Iranian Gas Company, from mid-March 2014 to early January 2015, his company produced 158 billion cubic meters of gas, or 16 billion cubic meters more than during the same period in 2013.

The Iranian also announced a 10% increase in gas exports. According to Montazer Torbati, eight billion cubic meters of upstream products were shipped abroad during that period. In addition, from March 2014 to February 2015, Iran’s gas exports exceeded imports by 2.5 billion cubic meters.

Tehran aims to further increase daily gas production (which had exceeded 600 million cubic meters at the end of 2014) by developing South Pars. There are also plans to build the critical infrastructure that is needed to boost the sales of upstream products to customers in the Middle East and EU.

Tehran aims to attract foreign companies in order to pursue its gas-shipment projects. Negotiations are already underway with Japan’s Mitsubishi Group, as well as South Korea’s Samsung and LG. In addition to Asian players, Italian firms have expressed interest in joining Iran’s pipeline projects, without waiting for a full rollback of the sanctions that keep foreign businesses from operating effectively in the Iranian market.

The buyers of Iranian natural gas may include Turkey, Armenia, and Azerbaijan. About 10 billion cubic meters of gas per year are exported to Turkish consumers, while the others receive about one billion cubic meters of Iranian fuel.

But these are negligible quantities for a state that is blessed with some of the greatest reserves in the world.

With this in mind, in recent years Iran’s leaders have been actively seeking to build bridges of natural gas that will link the country with its regional neighbors, with a focus on Pakistan and the Persian Gulf nations.

Thanks to financial input from the Chinese, who in April officially announced their intention to build a section of the Iran-Pakistan pipeline, that project can be complete within two years.

The Iranian portion of the pipeline (about 900 km.) has already been built, so the ball is in Islamabad’s court, and they managed to squeeze the maximum out of many months of backroom negotiations with Beijing, reaching an agreement with the China Petroleum Pipeline Bureau, a subsidiary of CNPC, to construct a 700-km. trunk line.

Then the gas pipeline will be connected to Pakistan’s existing gas-transmission network. The construction of the remaining section of the pipeline (about 80 km.) to the Iranian border will be Islamabad’s responsibility. Once the project is up and running, the Pakistani market will receive about 28 million cubic meters of Iranian gas per day.

Shipments of Iranian gas to Iraq, totaling four million cubic meters per day, should begin this summer, and later increase to 35 million cubic meters per day. The Iran-Iraq gas pipeline could be extended to Kuwait, and active negotiations to that end are underway.

In April, Ali-Reza Kameli, the head of the National Iranian Gas Export Company, stated that Oman plans to import about 28 billion cubic meters of gas per day for 25 years. It is expected that the construction of the Iran-Oman trunk line will be completed by 2017. However, the project deadlines may be pushed back due to disagreements between the parties over the price of gas.

The future also looks murky for the export of raw materials from Iran’s Salman field to the UAE, since the parties’ negotiations stalled over disputes about the price and volume of gas supplies, and the contract is now in the hands of international arbiters.

When speaking of potential exports of Iranian gas to Europe, it is worth emphasizing that according to Iran’s president, Hassan Rouhani, if Western sanctions are fully lifted, his country is ready to supply 20 billion cubic meters of gas to Europe by 2020.

Europe is also the biggest market for Russian gas and there are rumors that Iran could become Russia’s business rival. However, the Russians have no cause to worry, because Iran has declared through its foreign minister, Mohammad Javad Zarif, that it is willing to work with Gazprom to build Turkish Stream.

Tehran and Moscow will not compete fiercely in Europe, since the parties have long been working on a detailed, effective mechanism that will enable them to share gas markets equitably, including at the GECF forum.

Besides, Iran has certainly not forgotten the many years of unique expertise and technological support that Russian gas experts have provided that country and will not put a spoke in Gazprom’s wheel, nor does that company have any intention of squeezing Iran out of the Asian market.

Eldar Kasayev

Eldar Kasayev is an expert on international law and investment in the energy sector of the Middle East and North Africa. His latest book is Qatar in the 21st Century: Today’s Tendency and Prognosis of Economic Development (in Russian).

Hazy Prospects for Iranian Oil

Hazy Prospects for Iranian Oil

After Iran and the P5+1 group of international mediators signed the framework for an interim agreement in Lausanne, there was a surge in reports from the international media, predicting a shock to the global oil market when it is flooded with Iranian oil later this year.

But what are the realistic prospects for such a sudden boom in exports from Iran?

Proved reserves of very impressive size lie under the surface of Iran. According to the Oil & Gas Journal, the country’s oil fields contain 157 billion barrels of petroleum and 33.8 trillion cubic meters of gas, comprising 10% and 17% of world’s reserves, respectively.

But despite these substantial resources, Iran’s exports are limited. Under the yoke of Western economic sanctions, Tehran stopped selling oil to the US in 2012, and the next year petroleum deliveries to the EU ceased as well. In addition, the International Group of P&I Clubs that offer maritime insurance to shipowners has imposed sanctions on the insurance and reinsurance of oil shipments from Iran. This will negatively impact exports of Iranian fuel to Asia.

It is worth noting that India, Japan, and South Korea have found an alternative way to obtain insurance: these countries have begun to issue sovereign guarantees to vessels carrying Iranian petroleum. However, even these potent measures have been unable to return the country’s oil exports to their pre-sanctions level.

Before the embargo, Iran produced over 4 million barrels of oil per day and shipped approximately 2.5 million barrels to overseas markets. Today exports have fallen by more than half, to only 1.2 million barrels per day. Production has plunged to 2.9 million bbl/d. The Iranians are facing the world while doing their best to keep up appearances, struggling to fill in the many chinks in their oil sector after years of sanctions.

Wherein lies the root of the problems in Iran’s oil industry?

It would be a gross oversimplification to blame everything on the sanctions, because there are plenty of other reasons for the drop in Iran’s oil output.

It should be kept in mind that most of Iran’s deposits were discovered for commercial purposes long ago. According to the statistics, about 80% of the proved reserves were identified prior to 1965. Many Iranian oil fields have been depleted after decades of exploitation, and thus production there has rapidly declined.

According to the Arab Oil and Gas Journal, Iranian fields have natural decline rates of 8% to 11% (which is relatively high), coupled with a recovery rate of 20% to 25% (which is low). In addition to the fact that the state is faced with the continuous depletion of its production capacities, the previously discovered fields in Iran lack the tools and technology to inject any “new blood.” The country has not brought a single new oilfield onstream since 2007, despite announcements of a number of individual new exploration and development blocks.

Iranian-Chinese cooperation

In fairness it should be noted that Iranian experts, along with their Chinese partners, are developing several deposits and sites (with mixed success), but this work is proceeding much more slowly than was originally planned.

The Azadegan field contains between six and seven billion barrels of oil, and was Iran’s biggest find in 30 years when it was discovered in 1999. That field is divided into two parts. China’s CNPC is developing North Azadegan in a two-phase process, with ultimate total production estimated at 150,000 bbl /d (75,000 bbl/d for each phase). The first phase is planned to be onstream this year or next, at a cost of $1.8 billion.

Nevertheless, the Chinese company, which has not escaped the sinking ship of the Iranian economy, has still heard complaints from the Iranians. Last year, the National Iranian Oil Company announced that it was canceling its contract with CNPC because of persistent project delays – the Chinese had drilled only seven of the 185 wells they had planned.

Image Source - AFP

Image Source – AFP

The Yadavaran field is another promising upstream project, with 3.2 billion barrels of recoverable oil reserves. China’s Sinopec signed a buy-back contract at the end of 2007, promising to invest $2.2 billion. That oil field produced 25,000 bbl/d in 2013.  Iran’s plans might seem bold, but the experience of CNPC, whose contract with Tehran was canceled, shows that it might not have been possible to bring all those plans to fruition, even after the possible lifting of the sanctions against Iran. Why?

Legal obstacles

Iran’s constitution prohibits foreign or private ownership of natural resources. As the journal Neftegazovaya Vertikal rightly notes, the production-sharing agreements (PSAs) so beloved by many contractors are also forbidden. Iranians use buy-back contracts (in which the state purchases oil from a company) that allow foreigners to take part in exploration and development projects through subsidiaries of Iranian state-owned companies.

Using funds from the export of raw materials, the Iranians repay a foreign contractor’s capital costs, and the annual repayment rate is based on a predetermined percentage of the field’s production and the rate of return on the invested capital. According to FACTS Global Energy, the rate of return on buy-back contracts varies between 12% and 17%, with a payback period of five to seven years.

Thus, a clear drawback to such contracts is the lack of flexibility of cost recovery.

In an attempt to learn from these lessons and attract greater interest from foreign players, Iran is developing a new oil contract model called an Integrated Petroleum Contract (IPC), the terms of which will be similar to a PSA.

Under the draft IPC, the Iranians will pay foreigners a share of the project’s revenue in installments once production begins at a field. According to the Middle East Economic Survey (MEES), the payment terms can be adjusted as the project progresses. IPCs are intended to encompass a longer period – between 20 to 25 years – which is double the amount of time permitted under a buy-back contract.

Geopolitics and economics

There is much to preclude any optimistic predictions about large quantities of Iranian oil flooding the market anytime soon.

First, the United States, which likes to play the Iranian card in its Middle Eastern geopolitical games, is unlikely to applaud once Tehran begins to sell impressive quantities of oil on international markets (prior to the sanctions, the Iranians sold petroleum to more than 20 countries), thus replenishing its own coffers. An influx of petrodollars would allow Iran to provide financial support to the regime of Bashar al-Assad in Syria, who has long been a thorn in the White House’s side. In addition, the greater availability of Iranian oil might raise serious doubts about the prospects for many oil shale projects in the United States.

Second, it is important to realize that Iran is a member of OPEC, although, like Iraq and Libya, it is allowed to operate outside the production-quota system for now. However, as soon as Tehran begins to show its teeth and increase its export capacity, the cartel will immediately intercede in a regulatory capacity to respond to that situation.

Third, the preliminary agreement itself that was signed in Lausanne is worded very broadly and leaves the United States room for inconsistent maneuvering, which is something that the administration of Barack Obama – and before him, George W. Bush – has done a lot.

Eldar O. Kasayev

Eldar O. Kasayev is an expert on international law and investment in the energy sector of the Middle East and North Africa. His latest book is Qatar in the 21st Century: Today’s Tendency and Prognosis of Economic Development.

The EU Energy Union Blueprint – One Voice, Different Interests

On Wednesday, Feb. 25, EU Energy Commissioner Maros Sefcovic presented an Energy Union proposal to supply Eastern Europe with gas from domestic sources. This draft document, which was made available to The Guardian, details another “paper” plan by EU officials that is completely out of touch with any sort of realistic system for providing energy as well as the interests of the oil and gas industry in the end-users’ countries.

Within the rich history of meaningless documents and projects on the theme of EU energy self-sufficiency, Maros Sefcovic’s project was preceded by the stillborn Nabucco pipeline, the Southern Gas Corridor, and a host of other initiatives. None of these ventures ever got past the stage of issuing memoranda of cooperation. At their first opportunity, the energy corporations ditched the idealists from Brussels and continued their focus on the interests of their clients.

Conseil_Tenu_par_les_RatsIn addition to the usual EU hedging, this time the presentation by the new Energy Union was accompanied by pompous references to the union’s origins in 1950, the alliance of coal and steel producers, and Franklin Roosevelt’s New Deal (“a new deal for energy consumers”). It is no recent revelation that when an EU bureaucrat suddenly brings up “values” and begins lamenting the self-serving interests of national corporate players, affairs in Brussels are going worse than ever. The whole narrative of Russia’s “excommunication” from EU consumers due to her sins in Ukraine is starting to resemble Aesop’s famous fable about an assembly of mice who convene in order to hang a bell on a cat (“They were accepting the proposal with great enthusiasm and applause, until a quiet old mouse stood up to speak, ‘Tis well said, but which one of us will put the bell around cat’s neck?’”).

The truth is that Ukraine’s latest refusal to pay its gas bills has been an unpleasant surprise for EU officials. Maros Sefcovic even said at a news conference that the issues of supplies and the price of gas for Donetsk and Luhansk regions will be treated separately from the “winter gas package” that guarantees deliveries this winter. In other words, Brussels de facto confirms the special economic status of these disputed territories.

No one wants to be responsible for wiping out Ukraine as a transit country because of a civil war in the center of Europe. Therefore the idea of an “energy union that speaks with one voice in global affairs” is being hastily concocted. Countries with diverse energy mixes, various configurations for their national energy consumption, and differing levels of industrial development are being strongly advised to coordinate their energy agenda with the former European Commissioner for Youth. The document is silent about whether the German energy conglomerates and French nuclear experts will want to “speak with one voice” together with consumers in power-hungry Moldova. It is not unreasonable to believe that those voices will be different.


Collective action problems in the EU do not arise because of conflicting values or Moscow sympathies. Cooperation with Russia is beneficial to Hungary, Greece, and other regional players because they have spent decades (1970-1990) forging energy ties with other countries of Eastern Europe with the help of the former Soviet Union. Forced to choose between paper projects vs. cheap energy for their constituents, any sensible politician would opt for the latter. What’s more, any head of state who authorizes Brussels to “veto” a bilateral agreement on an energy partnership will appear, in the eyes of his own countrymen, to be selling off the nation’s sovereignty. The fact is, the 28 national regulatory frameworks that have currently been adopted by the EU member states, in contrast to many documents from Brussels, do not exist merely to flaunt their beautiful infographics at press briefings. National energy legislation reflects the specific interests of the oil and gas, coal, and nuclear industries, as well as that of the trade unions in each nation.

Curiously, the political goal of allowing strict supranational regulation from Brussels over the economy coexists in the document with entirely liberal appeals “to reduce administrative barriers.” Conceptually the new Energy Union is an odd, two-headed monster, born – one must understand –out of EU commissioners’ desire to regulate the foreign trade of corporations within national states. From a practical point of view, the document has only one important psychological function, which is to act as a type of inspiring fairy tale for Ukraine’s weakened economy – a gesture of EU’s goodwill on the part of those who are responsible for gas talks in Kyiv.

Ukraine To Disappear From EU Energy Picture By 2019

Ukraine To Disappear From EU Energy Picture By 2019

The modest installment payments that Ukraine is making on its $2.440 billion debt to Gazprom are not enough to restore the reputation of that country as a reliable transit partner. Since Russian gas is being persistently redirected south and east, Kiev’s role as an intermediary for Europe’s gas might slowly wane between now and 2019.

The “Turkish Stream” – the alternative route that the Western business press has described as “just another attempt to blackmail the EU” – is beginning to take tangible shape. The longer of two potential routes of the new pipeline has been selected. It will follow South Stream’s proposed undersea corridor, but veering off at the end in order to land on the Turkish coast, instead of emerging in Bulgaria next door.


Turkish Stream

Gazprom and the Turkish company Botas Petroleum Pipeline Corporation have confirmed their intention to pump the initial shipment of natural gas into Turkey through the new pipeline in December 2016. The bilateral agreement will be signed before the end of the second quarter of 2015. These latest negotiations to get “Turkish Stream” up and running is a clear signal to the European Union that Gazprom’s southern detour is being developed in with an eye toward the future. And there is no Ukraine in that future.

Ultimately, a civil war in a transit country should be seen as an example of force majeure, and one in which Germany, France and Poland themselves had a hand in creating back in February 2014. Yet EU Energy Commissioner Maroš Šef?ovi? still believes that gas transit through Ukraine is a “better option”. However, first the EU will have to explain to its member states why on earth the Southern European consumers would need Kyiv as a mediator. Today Ukraine is on the brink of sovereign default and is known for siphoning off natural gas for its own needs.


EU Energy Commissioner Maroš Šefčovič

The current contract between Gazprom and Naftogaz Ukraine will expire in 2019, reducing to zero these risks of natural gas transit via Ukraine. In addition, the construction of a gas hub on the Turkish-Greek border will force the delivery map for the continent’s energy supplies to be redrawn, and it could diminish the role of Austria’s Baumgarten hub, which is currently the region’s primary gas-distribution center. Four years is very little time in which to create new projects.

If the European Commission wants to get gas from Turkey by 2020, then it is high time it starts building infrastructure – in full accordance with the “Third Energy Package” or any other legal restrictions that the Europeans deem necessary. Otherwise, Brussels will be left with a dubious asset on its balance sheet, in the form of a Western fragment of Ukraine (the European equivalent of what Somalia was in 2009), which will have to be subsidized using various ploys for semi legal “reverse flows” of Russian gas purchased through Turkey.

The flexible structure for obtaining gas supplies via the “Turkish Stream” allows a number of potential options for the interim 2016-2019 period, but the final configuration of the gas network will depend on how far the EU’s energy leaders are willing to pursue their suicidal policy of rejecting Russian resources. While Brussels is complaining about Russia’s efforts to make Ukraine pay its natural gas bills, other countries, such as Hungary, Greece, and Serbia, seem more open to the opportunities of the “Turkish Stream”.

Hungarian Prime Minister Viktor Orbán, for example, is sure that the EU’s economic sanctions are “in conflict with Hungary’s interests” and he intends, in his words, “to come to terms with Russia on a gas agreement” during a meeting with Russian President Vladimir Putin in Budapest on Feb.17. No one is likely to accuse this conservative politician of being enamored of Russian gas, after he declared that Hungary must avoid becoming the “happiest barrack of Gazprom”, as the Los Angeles Times reminds us. Nevertheless, the pragmatic approach has prevailed in Hungary.

An increasing numbers of South European countries view themselves as potential replacements for Ukraine in Russia’s new gas-delivery route. Bulgaria, with her modest energy resources, might be one exception – she threw in her lot with the losers when she bowed to unprecedented political pressure in regard to gas issues.

The states that were at least somewhat able to defend their right to energy sovereignty are now among the winners. And those who followed the advice of European bureaucrats, sacrificing their gas trade in order to join in the general chorus “demonizing” Russia for the events in Ukraine, will take a big hit.

Russian Gas Provides Lifeline To Chinese Expansion

Russian Gas Provides Lifeline To Chinese Expansion

he shale gas game began to cool in China after the latest plunge in oil prices. However, thanks to the recently concluded Power of Siberia pipeline deal, Beijing will be able to rely on a stable supply of natural gas from Russia during a highly volatile time for the market.

Ever since 2010, when the State Dept. first introduced fracking as a panacea for all energy problems, the technology has transformed the US energy sector, but it has remained more of a psychological phenomenon in Asia. The fracking game is over in both China and continental Europe, as a result of the recent plunge in oil prices.

The majority of the existing agreements within the Chinese market have made little progress beyond the preliminary stage of studying the oil and gas fields. Jim O’Neill’s classic advice, “never… attempt to forecast the price of oil,” has become a self-fulfilling prophecy for shale-oil projects outside the United States (here’s an insider tip: if you hear someone claim to “sense the trend” on the current oil market, feel free to kick that liar in the name of science – at least verbally). Suffice it to say that in the golden days of the fracking bubble, even the bestselling author and pundit Daniel Yergin fell into the trap of trying to forecast the Chinese shale bonanza.

Image Source: Platts

Three years ago, with the help of major global energy companies, Chinese state corporations invested about $7 billion in 400 wells across China, including 130 wells drilled horizontally. In hindsight, China’s attempt to import fracking technology “as is” from the United States to Sichuan Province was neither economically feasible nor environmentally friendly. At first, the production profiles for shale deposits in Sichuan were as high as 60 billion cm/year. But in August 2014, China halved the quantum of shale gas it expects to produce by 2020, after early exploration efforts to unlock this unconventional fuel resulted in an explosion at a shale-gas drilling rig that reportedly killed eight workers in the small town of Jiaoshi.

Currently, wells in Sichuan cost about $13 million – much more than even the most expensive wells in North Dakota – and the gas-recovery rate in those Sichuan wells is below 20%. According to Bloomberg’s forecast, in 2015, shale will account for up to 3% of the country’s total gas consumption that year, which is not bad considering the immense scale of the Chinese energy market in real terms. However, shale output will not be able to satisfy the growing demand for natural gas in China, even assuming a quite modest 6.5% increase in nominal GDP. According to the Economist Intelligence Unit industry report on energy (2014), total energy consumption in China will reach 3,550.2 million tons of oil equivalent by 2020. In short, there’s houseroom for everybody in the Chinese market.

China needs Russia’s natural gas and remains a crucial market for Russia to enter, and now Russia’s natural gas exports to China will expand thanks to the Power of Siberia pipeline. This agreement is a gateway to bilateral energy cooperation between these two BRICS leaders. It is a win-win deal that was reached after a decade of difficult negotiations, and is not merely a “response” to sanctions. It was never intended as any sort of retaliatory move. The energy partnership between Russia and China began long before the European Union helped to destabilize Ukraine while embracing the suicidal policy of cutting itself off from Eurasian resources through legislative barriers like the Third Energy Package. In 2014 Russia’s biggest energy company, Gazprom, was finally able to break through to the largest consumer in Asia because of other success stories, i.e., the ESPO pipeline and the adoption of better practices throughout the Russian energy industry. “We have signed agreements to increase crude oil supplies, created joint ventures for oil exploration and production in Russia, and started the construction of a large joint refinery in China. Chinese companies have joined gas projects on the Russian Arctic and Sakhalin shelf,” summarized Deputy Foreign Minister Igor Morgulov in his interview with the Xinhua news agency on Jan. 13, 2015.

Long-term natural-gas contracts may take years to iron out and conclude. However, at present they are far more reliable than unconventional gas or green alternatives. Once finalized, bilateral long-term agreements remain in full force for decades, despite inevitable periods of high volatility in energy prices.

EU Fracking Boom Becoming Less Likely

EU Fracking Boom Becoming Less Likely

Pro-fracking campaign in the global media is fading fast. A year or two ago the extraction method suitable for the Arizona desert was presented as a key component of the EU’s energy security policy by high-ranking officials in the European Commission. Many large corporations that announced an influx of investment into Eastern European fracking projects between 2010 and 2013 are now gradually reducing the scope of their planned work. Their decision was prompted by environmental and political problems that receive insufficient coverage in the industry media. It’s becoming clear that fracking technology can’t be brought to the EU “as is” from the United States.

Recently published data by Rice University, Texas indicates that simple recycling of the tainted waste water is not safe, writes. A year or two ago supporters of hydraulic fracturing used to preach about “green innovations in the shale revolution” with the passion of small-town televangelists, but now, after the publication of new data, they have switched tactics and simply remain silent about environmental problems. Yet concerned citizens of New York City are more aware. “Making fracking safe is simply not possible, not with the current technology, or with the inadequate regulations being proposed,” Louis Allstadt, former executive vice president of Mobil Oil, said during a news conference in Albany called by the anti-fracking group Elected Officials to Protect New York.

What did the U.S. State Department do with a not-so-green technology that is too dangerous to use at home? Export it to the closest allies in Europe, of course. Nor should one forget that in the United States itself, the “shale bubble” would have been impossible without the direct support of U.S. Dept. of Energy programs, as well as the backing of Hillary Clinton’s State Dept., which pushed the issue on an international, political level.

In 2011 Forbes was painting the optimistic forecasts about the future of shale gas in the EU, but today there are at least a few reasons why these claims have been left hanging. Lawmakers in Europe have strictly limited the use of fracking technology in some EU countries, such as France, the Czech Republic, Bulgaria, and to a certain extent in Germany. Even in the United Kingdom, where legislators usually follow the US lead and take a much more optimistic view of fracking, a special parliamentary commission concluded in May 2011 that the nation’s explored shale reserves hardly merited the title of a “shale revolution”. Given the rising global demand for energy (up by 40% according to IEA estimates), shale gas will do no more than find its own niche within the British energy mix. And there is absolutely no reason to believe that continental Europe, with the strictest environmental legislation in the world, would accept shale more readily than the British Isles.

The current seasonal decline in oil prices has also been interpreted by some of Russia’s former energy officials as a direct consequence of the shale revolution. The predictions are being made about the impending end of the “oil era” and the cheap American energy that will soon be flooding the European market. Thus it is important to note that the very low cost of oil will make it completely unprofitable to develop oil fields using hydraulic fracturing technology. In other words, dreams of a“post-carbon era” will not come true within a reasonable planning time-frame. And OPEC members are unlikely to want a repeat of the landslide of prices, which deeply frightened many Middle Eastern and African countries in 1985-86. Today Saudi Arabia’s budget for 2015 was calculated based on an oil price of $98 per barrel, Nigeria proposed a $78/b oil price benchmark. Global price forecasts vary from conservative $70 (Goldman Sachs, Commerzbank) to bullish $100-105 (Barclay’s, Standard Chartered). Note that both price forecasts set a limit to the use of shale in Europe.


The three main arguments made by the exporters of fracking technology to Eastern Europe look particularly controversial today. Let us take a look at these arguments in the light of the new data.

1. Fracking imports to Europe are needed here and now, “as is,” with no need to take into account the economic situation in each EU country or its economic potential.

The promotion of fracking technology cannot significantly affect the Eastern European market without factoring in each country’s economic situation, as well as the local and regional energy balance, infrastructure, and logistics. In every country, be it Bulgaria, Serbia, or France, there are interest groups (lobbies for nuclear energy, coal, etc.) ready to defend their share of the national energy mix. Reformatting the local market is a task that will keep European bureaucrats busy for years, if not decades. Local conditions always dictate the rules of the game. The most striking example is the recent failure of the Shell project to produce shale gas in the Donbass region. Of course, a bloody civil war is an unusual type of force majeure, but at the same time, this case is a good example of a corporation that pulled out because of sudden problems in the field.

2. Any damage fracking causes to the environment can be predicted and the risk managed using business procedures that have been previously tested in the U.S.

Although the damage from fracking may seem common knowledge, in fact, the subject of environmental oversight is still quite critical. Ask the local residents about earthquakes in Great Britain, look into water poisoning in Poland. Judge for yourself the scale of the farmers’ revolt in France and Romania. The farmers understand – the corporations using fracturing liquid that poses a threat to ground-water reservoirs have a tendency to waltz in, make their money, and leave, while their children have to grow up on poisoned land. Practices that have caused problems even in the vast deserts of the southwestern American states could lead to a new Chernobyl in the densely populated countries of the EU. However, for many Euro-Atlantic politicians fracking represents the latest path to energy security and a way to “contain” Russia, making this the wrong time for discussions of its safety or economic viability (too many careers in Brussels are dependent on the confrontational style of energy policy).

3. The shale revolution can quickly “liberate” Europe from its dependence on piped-in gas and long-term contracts.

An important advantage of pipeline supplies provided under long-term contracts is their predictability and stability. Moscow continues to scrupulously fulfill its contractual obligations, and thus the underground gas-storage facilities in Western Europe are not running low on Russian gas despite the new “Ice Age” – stemming from the problems in Ukraine – that has overtaken the relationship between Russia and the EU. The Euronews television channel has a lot to say about the importance of shale gas and alternate supply routes (such as the TAP), but few officials in the European Commission see these projects as realistic – just take a look at the EU’s policy papers. EU officials avoid wishful thinking when composing documents for their own consumption, noting such facts as: production in Norway is declining; the South Stream pipeline – viewed objectively – is indispensable; LNG from Qatar is expensive and the Japanese will be vying for it as well; and so on. Long-term contractual commitments stabilize the market, prevent the spread of non-transparent re-export schemes, and provide German industry with the raw materials needed to revive the EU economy. As noted by the Austrian energy expert Klaus Warum, in the EU the term “Security of Supply” is used by the European officials to describe what is actually a form of unfair competition in the energy market.

Thus, it is unlikely that we can expect to see a repeat of the American “shale boom” in the next few years here in Europe. Fracking will certainly be limited in Europe (5-15% of the market, depending on local conditions). There has been so much bluster by EU officials about winning “the EU’s independence from Russia” using American technology that now they cannot just abruptly abandon the dream of “freedom gas.” The obvious advantages of utilizing the major gas-delivery routes, as well as a trading system based on long-term contracts, will counteract the effect of any dramatic increase in the role of shale gas in the EU’s energy systems.

Curious contradiction is striking. On the one hand, strident claims of how the “shale boom” is going to liberate Europe continue to be published. On the other hand, a very unhealthy interest is arising in the creation of regulatory risks that affect the supply and storage infrastructure (the technical and economic parameters, the bureaucracy surrounding the OPAL pipeline, the German media outrage over the sale of RWE Dea, etc.). Suffice it to cite one recent example of this type – a shocking statement from Michael Theurer, a member of the European Parliament from the Free Democratic Party (a pro-American and quasi-liberal party), claiming that if the gas-supply situation worsens, the gas-storage tanks of private foreign companies operating in Germany would need to be – drumroll please – “nationalized” (“gegebenenfalls durch Enteignung sichern”). This suggestion from a purported liberal that “private property be expropriated” was published not in some communist rag like Vorwarts!, but in Focus, an influential national weekly, in an important editorial on the gas issue. This leads one to the conclusion that if fracking were truly a panacea for the chaos in Ukraine, this “business-oriented” MP would be unlikely to threaten foreign investors with confiscation and expropriation.

If common sense is to be sacrificed in sanctions tit-for tat, Europe will have to use coal or expensive petroleum products, believes Dr. Pavel Zavalny, President of the Russian Gas Society, Deputy Chairman of the State Duma Committee on Energy. “If we look at the negative scenario, gas prices for Eastern and Central Europe could jump to $800 per 1 thousand cubic meters. It will also have a rippling effect in the Asian markets, as the European consumers will have to compete with Asian consumers.” The expert noted that, in case of tougher sectoral sanctions, Russia’s oil & gas industry will invest more in oil equipment and reorient its investment policy to China. In some cases it may entail a delay of completion of the projects on time and on budget. “This is not the first time in history sectoral sanctions are implemented against Russia. We always overcame all difficulties and became only stronger” – concluded Dr. Zavalny.

What should the European officials do now with their enormous collection of promotional materials touting fracking and expensive alternative energy sources? Probably toss it all in the trash, along with the pizza ads, and await the next “bubble.” Although it’s hard to say what that one will look like. But to get an idea, let’s look at the acknowledged leaders of public initiatives in the US. For example, the Bill & Melinda Gates Foundation, the world-famous endowment established by these genuine philanthropists, recently took an interest in a fuel source as ancient as the world itself – dry animal dung fuel. If the US State Dept. plugs its resources into the creation of dung-fuel propaganda, that will spawn an eco-friendly and energy-efficient candidate ripe for promotion as the next financial bubble and freedom fuel for “liberating” Eastern Europe. As they say, back to basics. And as a bonus – five years of fresh headlines in the international business press.

Martin Armstrong Warns The West: “Sanctioning Russia Is A Big Mistake”

Martin Armstrong Warns The West: “Sanctioning Russia Is A Big Mistake”

Via ZeroHedge Armstrong Economics:

“Politicians just keep making the same mistake over and over again. They perpetually turn to sanctions bankrupting private business with no respect whatsoever as the USA is wiping out farmers in Europe. But worst of all, there is not a single incident where sanctions have EVER worked even once. They often remain in place beyond a decade even as in Iran, but there is no change in politics.”



Three more points on sanctions against Russia:

  1. “Isolation” means broader import substitution and rapid re-industrialization of Russia’s oil & gas sector. Dr. Sergey Glazyev, full member of Russian Academy of Science, has been developing the theoretical framework for the second “revolution from above”  since the early 1990-es. For a number of reasons (including Russia’s wicked climate, of course) scientific, industrial and technological revolutions were often triggered by sanctions.
  2. Decades of economic sanctions made the Islamic Republic of Iran and the Soviet Union stronger. Both China and Iran have learnt the lesson of “Catastroyka” – total destruction of the national state (term introduced by philosopher, ex-dissident Alexander Zinovyev (“Perestroika” + “catastrophe”).
  3. Current turmoil that erupted in Russia’s foreign exchange/stock market will not affect the industrial sector. Barclays’ oil forecast assumed Russian oil production of around 10 million barrels a day would decline slightly by 20,000 barrels daily next year because of the sanctions (compare it, for instance, with hysterical fearmongering in the Russian “business” media).

Read more:

Punitive Isolation Will Do to Russia What Versailles Treaty Did to Germany by 


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